Wednesday, December 23, 2009

Joshua Brown at the Reformed Broker posted this chart showing asset returns for different classes over the past decade. As you can clearly see, stocks are the laggard asset and the only one posting a negative return. This may be as definitive a defense of diversification as I've ever seen, considering the fact that in no decade previously has the equity premium ever been negative.Diversification says that holding a basket of these assets rather than placing the whole enchilada in stocks would have paid off big time. A quick, back of the envelope calculation shows that a portfolio that was allocated 50/30/20 stocks/bonds/alternatives would have netted over 4% per year which is well and away the -1% stock return.This could change things in wealth management/investment planning by convincing people that chasing the equity premium is more risky (hence dangerous) than they were previously convinced it was.

About Demand Equilibrium!'s author

I'm a budget analyst in Washington, D.C. This blog has a number of purposes: I use this blog to have a historical, electronic record of my financial/economic readings. Another purpose is to write about current economic, financial, investment, and market data while developing my writing style and voice. Finally, I try to spice it up by throwing in humorous cartoons, pictures, and haikus. I hope you enjoy.